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Mario Draghi chose his moment well. The financial markets were expecting the meeting of the governing council of the European Central Bank to be a non-event. As it happened, it was anything but the expected big yawn.
The first surprise was that the ECB again cut interest rates, despite Draghi having said earlier in the summer that they were already at rock bottom levels. The second shocker was the announcement that the bank would start to purchase asset-backed securities as a way of getting money into the banking system.
The reason for the action is simple: growth in the eurozone looks a lot weaker than it did earlier in the year. A fresh recession could drive the single currency zone into outright deflation, so the ECB is doing its level best to import some inflation by driving down the value of the euro. By picking a moment when the dollar was already riding high on the foreign exchanges, Draghi managed to push the single currency down by two cents yesterday.
The plan, clearly, is to get ahead of the curve and so avoid the need for full-blown quantitative easing (QE), something Germany and its allies oppose. But if buying asset-backed securities doesn't work, QE will be the one remaining shot in the locker.
In truth, it all looks too little, too late. European banks do not seem to be short of cash; rather, it is that they are unwilling to lend and that animal spirits among businesses are so low. Keynes, who called this pushing on a piece of string, would be advocating cuts in taxes or higher public spending as a way of generating growth.
That is, indeed, the way forward. Germany could avoid the need for QE by running down its budget surplus, thus boosting consumption and helping other eurozone countries. If the ECB does deploy QE, it should bypass banks more inclined to hoard than lend. Any new money should go directly to consumers or be used for capital investment projects.
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